Blog

Islamic insurers to refocus on profitable segments

Improving insurance profitability in some of the sectors such as motor insurance and medical insurance are expected to result in Islamic insurance players refocusing in these sectors, according to analysts.

“The main lines of business for Takaful operators in the region are motor and medical insurance, and these markets have benefited most from the recent premium rate increases, particularly in Saudi Arabia and UAE. We therefore expect Takaful operators to refocus their underwriting and servicing operations on these lines, and to take an increasingly selective approach to other product categories,” said Mohammad Ali Londe, an analyst at Moody’s.

Previously, weak underwriting results in the core medical and motor lines forced Takaful insurers to widen their product offerings. The insurers often incurred significant additional direct and indirect expenses as a result, without achieving the scale needed to operate efficiently in their new business lines. A revised focus on medical and motor would allow Takaful operators to streamline their operations, improving efficiency.

Analysts expect the continuing positive environment in the industry supported by strong profitability is expected to attract fresh interest in the GCC takaful sector from both existing shareholders and new investors. This would allow takaful operators to replenish their capital. It would also improve their financial flexibility, equipping them if necessary to participate in market consolidation. Merger and acquisition (M&A) activity has previously been on hold because of the weak underwriting performance of some players in the sector.

GCC Takaful insurers’ results for the first nine months of 2017 reveal that underwriting profitability has improved in most countries. In Saudi Arabia and UAE, the upturn reflects an increase in premium rates triggered by the introduction of actuarial reserving.

In UAE, motor premium rates rose in 2017 as a result of the country’s new unified motor policy which provides standardised coverages for policyholders.

The increase in premium rates reduced UAE Takaful operators’ weighted average loss ratio to 63 per cent at the close of the first nine months of 2017, from 89 per cent and 79 per cent at year-end 2016 and 2015 respectively.

Premium rates in Saudi Arabia rose in 2014 and 2015 following the introduction of actuarial reserving requirements in 2013. As a result, Saudi Takaful insurers’ loss ratios having already improved from in 2015 further eased to 78 per cent in 2016 from 80 per cent the previous year, and fell again to 77 per cent in 9M 2017.

As a result of the lower loss ratios, Takaful operators in UAE and Saudi Arabia that were reporting large underwriting losses in 2015 and prior are now profitable or approaching profitability. Operators that were already profitable have strengthened or maintained their underwriting profitability. In some GCC countries, including UAE and Saudi Arabia, the improvement in Takaful insurers’ underwriting profitability has started to reverse the previous deterioration in their capital adequacy. This is reflected in the increase in their ratio of equity to total assets for UAE in particular whilst the Saudi market appears to be stabilising having already passed the trough trend in 2014 and 2015.